pdfInt banking chapter #11 - MODULE 11 Risk Management...

1 MODULE 11 – Risk Management Introduction In this Module, we will undertake a comprehensive examination of all the risks associated with the operation of the IB system. We will examine several banking crises and their implications in the contemporaries and modern times. We will briefly discuss the economic and political consequences of emerging global terrorism, money laundering and financial crime which prompted enactment of the USA PATRIOT Act. The roles of the World Trade Organization (WTO), World Bank (WB) and International Monetary Fund (IMF) will be touched upon, including anti-sentiment for the said organizations. Objectives Upon successful completion of this module, the student should be able to: • Articulate all the risks associated with the operation of the IB system. • Elaborate upon some of the banking crises (debt crises) of the 1990’s. • Discuss the USA PATRIOT Act and the anti-money laundering aspect of it. • Examine the roles of the WTO, World Bank and IMF, and their monetary policy ramifications. L ike every other financial and economic entity, the operations of international banks are exposed to a series of risks when conducting business in an environment of economic uncertainties, cultural diversity, sovereignty and regulatory issues. Globalization of the economic and financial systems has led to an increase in interdependencies amongst nations of the globe for goods and services, coupled with specialization and comparative advantage. This process brought a relative degree of economic prosperity for everyone, and international banks were a catalyst in the streamlining of the above activities. At the same time, it posed a greater risk for the IB system. It is known and understood in financial and economic forums that no business enterprise can predict a risk posed by certain externalities outside of their control, but they can utilize tools and means to ensure the risk is either eliminated or reduced within their operation. Investors in the financial market operate under the assumption that the system is efficient and perfect. This assumption can be realized when there is no asymmetric information in the financial market. Two important factors that are responsible agents for the existence of such anomalies are adverse selection and moral hazard. Both of these anomalies pose serious risks to the operation of IB. In order for the banking system to prevent exposure to these types of risks, banks need to have certain checks and balances in place for obtaining proper information so they can protect the value of the securities in their

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